Greggs‘ (LSE:GRG) shares surged 23% in late July after strong H12026 results, but have since slipped 8.7%. Has the short-term hype died already, or is just settling before the next leg up?
I decided to see if the shares still offer good value for investors who are a bit late to the game.
Looking closer
The recent price performance was a breath of fresh air for weary investors like me. We’ve watched the stock bleed 39.4% over the past five years, as the bakery chain grappled with changing tastes.
But besides strong results, several recent developments have renewed my conviction in the stock. But is it enough to consider adding to my position?
First, let’s review the results and see what’s hiding in the details. The results look excellent on the surface — sales rose 7.2%, operating profit 22.9%, and cash generation after lease payments 18.3%.
But management still expects full-year profit to be broadly flat, because the new Derby distribution centre will add roughly £10m to operating costs.
So can the company grow into its expensive new infrastructure quickly enough to restore returns on capital?
The bull case
Most of the capital investment is now done. H1 capex fell to £77.8m from £172.1m, while full-year capex guidance was reduced to about £180m. That boosts the possibility of dividend increases going forward.
Most of its new shops are opening in places where there isn’t a Greggs nearby, so they are attracting new customers rather than stealing customers from existing shops. And even when opening nearby, sales at the existing store only drop by 5% on average.
On top of that, its B2B delivery service grew from £116.3m to £137.5m, and the loyalty programme is gaining traction. So the business looks to be heading in the right direction. So what’s the catch?
A few sobering details
Sales growth is slow, with like-for-like sales at franchises up just 1.3%. The H12026 profit growth is also mostly comparative, since adverse weather impacted H12025 performance.
And while Greggs reported £15.9m of net cash, it has £454.2m of recognised lease liabilities. Notes from the earnings call on 29 July indicate they expect little earnings progress before 2028, as the cost of new investments balance out.
In short, while these results are promising, the next ones might not be. That could cause the price recovery to hit a wall.
The bottom line
The bull case assumes Greggs grows into the infrastructure and eventually gains operating leverage. The bear case assumes sales growth remains modest while warehouses, leases, wages and other fixed costs absorb most of the benefit.
From an operational point of view, it still presents like a healthy, solid business. But heavy investment has weighed on earnings, and the next 12 months could be testing. If any unforeseen developments hurt sales, a dividend cut isn’t off the cards.
For now, I remain convinced by the long-term viability of the business and will hold my shares. However, I don’t see any rush to consider buying more – it could be a while before a real recovery kicks in.
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Mark Hartley owns shares in Greggs.
This story originally appeared on Motley Fool
